Are you excited about getting in on the newest companies going public, but feeling a bit lost about how to do it? Well, we’ve got you covered with this guide. We’ll take you step by step through the process of investing in an Initial Public Offering (IPO). It’s like a backstage pass to potentially making some big money in the stock market. Let’s get you started on your IPO journey!
The Context
If you can get an IPO, don’t buy it. Only buy IPOs you can’t get — Vahan Janjigian
Our conventional opening, which you can see at the top, is intended to caution you about investing in initial public offerings rather than to discourage you.
An Initial Public Offering, also known as an IPO, is a procedure for raising capital from the public as mandated by SEBI. If you’ve noticed, the majority of businesses choose to launch their initial public offerings (IPOs) during strong bull runs.
Simply put, this is because during a bull run everything sells, but after a while sensibility appears and prices reach their actual level. In 2021, more than 63 initial public offerings (IPOs) raised more than Rs. 1 lakh crore, making it a successful year for primary markets.
According to estimates, about 10 lakh investors took part in the 2021 IPO rally.
But for most IPOs, the long-term actuality is a bit different. Talking about the U.S., the success rate for initial public offerings (IPOs), according to a Nasdaq survey of businesses that have gone public during the 1980s, is around 20%.
This suggests that after a firm first listing on a stock market, 80% of them ultimately don’t turn out to be long-term profitable. The overall enthusiasm for IPOs in India can be explained by the fact that the situation is significantly better here than in the US markets.
According to our analysis, 60% of IPOs that were placed on the public market over the past 10 years have produced satisfactory gains, while 40% have experienced significant value losses. The good news is that this is three times more reasonable than the US markets.
For the majority of long-term investors, investing in an IPO implicates careful consideration and demands ongoing monitoring of the firms even before they decide to go public. Another obstacle that prevents retail investors from performing their due diligence is the availability of the data required for sensitivity analysis.
However, if you want to sell these stocks after allotment and do not see them as detours from your investment philosophies, you can use the IPO frenzy for immediate cash gains. If you’ve never invested in an initial public offering before, you may use this comprehensive guide to discover how to do so.
Requirements for IPO Investing
It’s critical to comprehend the fundamental prerequisites for applying for an IPO before we go any further.
💬 You must be an adult (18 years of age or older).
💬 By national law, you should be able to make a binding agreement.
💬 You must have an active Demat account.
💬 You would also require a trading account if you want to sell your stocks on a listing day.
Additionally, if you wish to buy IPO shares, you must have a PAN card, which is a document issued by the Income Tax department.
Types of IPO Investors
There are three different categories of IPO investors – Retail Investors, HNIs (High Net Worth Individuals), and Financial Institutions.
Retail investors are those who contribute less than Rs 2 lakh to an IPO.
Purchasing a retail quota is a wise investment choice as SEBI ensures that the system for allocating shares is set up in a way that ensures as many retail investors as feasible receive an allocation of shares. In this situation, the likelihood of allocation is significantly higher. Although Institutions receive an elective allocation, the allocation method for HNIs (high-value applications) is relatively comparable.
Categories of IPOs
There are two types of IPOs: Fixed-price IPOs and book-built IPOs. In an IPO with a fixed price, the company determines the price in advance by adding the par value and the premium.
You must pay that price to apply for this type of IPO.
In a book-built issue, the business will only give a broad idea of the IPO price range; the actual IPO price will be ascertained through the book-building procedure. The book-building process involves price discovery by generating and logging investor demand for shares.
The “leakage” of value that frequently occurs with fixed-priced IPOs is resolved by the book-building process, which is thought to be more effective in investing circles. The basis of IPO allotment is finalized under the book-built technique within 10–12 days, and the Demat credit follows shortly after. You are free to cash out (sell) after they are in your Demat account and the stock is listed on the exchanges. The book-building technique is the only one being used these days to launch IPOs.
How To Apply Offline
You must have a Demat account to apply for an IPO. If you get shares as part of the IPO offering, your Demat account will be credited with them.
You can participate in any IPO by applying directly through your bank. The steps for submitting an IPO application through your bank branch are listed below.
≡ Step 1— From the BSE/NSE website, download the application.
≡ Step 2— Fill in all the required information like the name of the applicant, PAN number, Demat account number, bid quantity, bid price, and other relevant details.
≡ Step 3— Make an application at the branch of a bank that participates in ASBA.
Whether your bank is a member of the ASBA participating bankers to that IPO or not can be determined by visiting the NSE/BSE website.
How To Apply Online
This is relatively easy!
You can register and log into an online application for an IPO by using the trading interface provided by your broker or through your bank. The advantage of an online IPO is that your trading or Demat account will instantly populate all of your data.
This implies very little administrative work on your part. The process for applying for an IPO online is incredibly simple and user-friendly.
≡ Step 1— Log in to your net banking account.
≡ Step 2— Click on the link named ‘IPO Application’ in your bank’s interface menu.
≡ Step 3— Choose the IPO you want to apply for.
≡ Step 4— Enter your depository details.
≡ Step 5— Place and confirm your Order.
≡ Step 6— The “Terms & Conditions” would then need to be accepted before you could place your offer.
Similar steps can be followed on the interface provided to you by your stock broker. ASBA can be triggered directly through the net banking option or the UPI app depending on your preferred mode of transaction.
Understanding ASBA?
The ASBA (Applications Supported by Blocked Amounts) is a fair service that has now been made available by SEBI. The benefit of an ASBA IPO is that you can hold off on writing a check or making any other payment for the offering until the allotment is made.
Your bank account will only be debited on the day of the allocation of the shares to the extent of the amount that has been blocked from your bank account to the size of your application.
For example, if you requested shares worth Rs 2 lakhs but only received an allocation of Rs. 1 lakh, only Rs. 1 lakh will be debited from your account, and the block on the remaining amount will be lifted from the designated bank account.
Maximizing Your Chances Of Allotment
You should be aware that the IPO allocation is not based on first-come, first-served principles. The allotment process is rather based on how investors responded to the initial public offering (IPO). Investors may receive all the lots for which they have applied if the IPO is undersubscribed.
The lot size is the number of shares you purchase in a single transaction, and it is fixed in the case of initial public offerings (IPOs) to enforce the minimum capital requirements to participate in the process.
The following information will help you increase your chances of receiving an allocation.
💬 Avoid submitting large ticket applications.
💬 Apply using several Demat accounts (friends or family).
💬 Bid at the cut-off price (the ceiling price).
💬 Take your time and avoid rushing.
💬 Don’t forget to approve the mandate request to activate ASBA.
💬 Make sure to check everything at least three times.
Conclusion
A company first makes its shares available to the general public during its first public offering. Once the IPO is released to the public, a variety of investor biases come into play, resulting in valuation dilemmas.
Therefore, on the bright side, you have the ideal chance to enter positions early on while enjoying the benefit of price transparency. Considering some drawdowns, researching an IPO before investing is a difficult and time-consuming task. IPOs are also subject to selling risk in the event of pricing disasters on the day of listing.
Finding buyers for your shares may prove difficult if the price crashes on the listing.
Making thoughtful investment decisions is hence much more important in this case. You can keep an eye out for our upcoming post to discover how to analyze companies even before they list.
That’s all for investing in initial public offerings. Did you find the information documented in this article helpful?
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2 Comments
In my opinion and after burning my hands in PayTm, most IPOs are overpriced. There are already numerous stocks available on the stock exchange. People should not invest in an IPO simply because the company is receiving favorable attention.
The majority of the companies you know by name will vanish within a few decades, it’s a contradiction if you are a value investor.